The government's proposals to curb the number of overseas students coming to Britain could "cripple" the thriving education sector, an influential cross-party Commons committee has warned.

The home affairs select committee says in a report that ministers' plans to change the student immigration system are based on flawed evidence and could lead to a loss of reputation for Britain.

The MPs say the package, being completed this week, could have serious, unintended, consequences that could damage Britain's place in the international student market, valued at up to £40bn a year.

The move to curb the annual flow of 300,000 students into Britain stems from the Tory pledge to reduce net annual migration from outside Europe to below 100,000 from the 2009 level of 184,000.

The Home Office has argued that since the student route accounts for 139,000 of the 184,000 total, it is essential to reduce the number of international students coming to study in Britain.

But the select committee says figures derived from the International Passenger Survey are "not fit for purpose" and inflate the number of students staying in the UK. "Although the UN requires students to be included in the migration figures, we are not persuaded that students are in fact migrants," conclude the MPs, adding that only those who seek to live permanently in Britain, or who stay an excessive time, should be regarded as migrants.

Instead, the MPs say, the government should recognise that students, through tuition fees and other spending, benefit Britain economically, and contribute to enhancing the UK's place in the world.

"Government policy ought to be evidence based. We are concerned that a policy based on flawed evidence could damage the UK education sector and have wider implications," says their report. "We strongly urge the government to examine the data [used] to extrapolate migration figures … we are convinced that it ought to be a priority for the near future."

Keith Vaz, the committee's chairman, said: "Generating policy based on flawed evidence could cripple the UK education sector. In the case of international students this could mean a significant revenue and reputational loss to the UK." The MPs reject the plan to close the "post-study work route" for graduates, warning of its use by Britain's main competitors to attract the best students. Politicians have also suggested alternatives to tighter language requirements, saying any cap on student visas would be undesirable.

Damian Green, the immigration minister, said the government recognised the important contribution international students made to the UK economy, but that the old student visa regime neither controlled immigration nor protected legitimate students from being exploited by poor-quality colleges. "We want to refocus the student visa system as a temporary route and one that is not open to abuse."

Ministers insist the plans would mostly affect "sub-degree courses" in private colleges, and leave top university degree courses unscathed.

Meanwhile thousands of people living illegally in the UK who are willing to leave voluntarily will be given the chance to apply to come back after just two years, the government said on Wednesday.

The move, designed to persuade illegal immigrants and failed asylum seekers to leave of their own volition without the need for costly forced removals, more than halves the length of the current five-year re-entry ban. But bans for those who continue to delay their return, causing extra work for the authorities, will remain at 10 years, the Home Office said.